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UK facing Depression-style hit as firms slump in March

FILE PHOTO: A view of workers at the mill of Tata Steel in Port Talbot

By William Schomberg

LONDON (Reuters) - Britain's economy looks set for a slump that in the short term could be deeper than during the depression of the 1930s, as a survey showed the coronavirus crisis caused a record downturn among services and manufacturing firms in March.

The composite Purchasing Managers' Index covering the two sectors fell to 36.0 from 53.0 in February and was weaker than a preliminary 'flash' reading of 37.1, data firm IHS Markit and the Chartered Institute of Procurement and Supply said.

The survey data were collected between March 12 and March 27, covering the period after Prime Minister Boris Johnson ordered the closure of bars, restaurants, gyms and other services businesses to slow the coronavirus outbreak on March 20.

Britain's dominant services industry suffered its sharpest fall by far since the survey began in 1996. Its index sank to 34.5 from February's 53.2, and was also weaker than the March flash reading of 35.7.

Sterling weakened almost half a cent against the dollar to its lowest since March 31 after the news, which was only a bit less bleak than the equivalent euro zone survey.

Andrew Wishart, an economist at Capital Economics, said the PMIs were probably underestimating the hit.

"We are forecasting a 15% fall in GDP in Q2, a larger fall in output than in the financial crisis or the Great Depression," he said.

"Our base case is that the recession won't be as protracted as either of those episodes. But evidence that unemployment is shooting up despite the government response raises the risk that the recovery takes longer than we expect."

Tim Moore, economics director at IHS Markit, said job losses had been mitigated by firms' use of a government scheme to temporarily put staff on leave, rather than fire them.

Britain's government has said it will pay 80% of the wages of workers who are furloughed by companies.

"However, employment levels across the service sector still dropped at the fastest pace for more than a decade, reflecting some forced redundancies and the non-replacement of departing staff amid widespread hiring freezes," Moore said.

British Airways <ICAG.L> said on Thursday it had struck a deal with its unions to suspend more than 30,000 cabin crew and ground staff. Data on Wednesday showed around 950,000 people in the United Kingdom have applied for welfare benefits in the two weeks since Johnson shut down swathes of the economy.

The PMI survey showed the biggest drop in new work among services firms and the bleakest business expectations in more than 20 years of data collection.

Technology services were the only area to signal a rise in business activity - possibly reflecting the stay-at-home order for many people - but new workloads for tech firms dropped more quickly than at any time since 2011.

A final PMI for Britain's manufacturing sector, published on Wednesday, showed factory output shrank at the fastest pace since the euro zone debt crisis in March.

(Writing by William Schomberg; Editing by Hugh Lawson and Toby Chopra)